First it was 401(k) auto-enrollment, then auto-escalation and now auto-portability.
Necessity is the mother of invention—and it certainly applies to the problem of leakage within the 401(k) industry. The issue of cashing out, rather than rolling over, small 401(k) balances is compounded by mandatory distributions that must occur when a plan is terminated or a participant leaves. The problem is felt most acutely in younger demographics with lower incomes and lower accumulated assets.
“Right now, 60 percent of participants with less than $5,000 completely cash out,” says J. Spencer Williams, president and CEO of Retirement Clearinghouse. “The rest are put into safe harbor IRAs, where their assets just sit.”
So what’s to be done? Auto-portability is one answer, Williams argues, something to which he and his Charlotte, North Carolina-based firm are dedicated.
“We have a background in helping participants roll-in assets from old 401(k)s into new plans,” he explains. “We first started hearing about leakage around 2011; now we hear about it every other day. This is actually when most major initiatives hit a tipping point. There is a public-market debate and then solutions start showing up.”
After examining three major reports from Fidelity, Vanguard and Aon Hewitt that consistently examined industry leakage since the problem was first identified, combined with high participant satisfaction with the roll-in process, Williams and his team were convinced of the need for auto-portability.
He points to a hospital group client with 250,000 plan participants that is a scientific sample of the larger national economy. He found that their cash-out percentages we’re about half of that of the national average.
“We went to the Employee Benefit Research Institute and asked them how much would be retained in assets if there was a 50 percent reduction in industry leakage. [EBRI research director] Jack VanDerhei ran the numbers and found out it would be about $1.3 trillion. Now, think about that—total industry 401(k) AUM is about $4 trillion to $4.5 trillion on any given day, so you just added about 30 percent back into the plans. What 401(k) advisor wouldn’t want that?”
The key, according to Williams, is in making portability for small accounts seamless, by which he means lower costs.
“If we can do that, we can capture a big part of that $1.3 trillion,” he adds. “We are the creators but not the only players in the auto-portability market. There are larger public policy issues here and the virtue of it all is getting something started in the industry.”
In keeping with his virtuous theme, Williams argues he and his colleagues are in the landfill business, because assets that are manually distributed (and not taken in cash) simply sit in the safe harbor IRA.
“We have to get into the recycling business,” he concludes. “The way to do that is through electronic records-matching. Auto-portably is really a marketing term, but the mechanism inside auto-portability is the records-matching. We can go to a firm, say Fidelity, and ask them if they have active accounts in these IRAs, which we will then automatically roll into the employee’s new plan.